Soviet Union

ECONOMIC POLICY

Socialist theory provides no practical guidelines or objective
criteria for determining priorities for the various economic
sectors and ensuring balanced growth of the entire economy. The
direction of economic development depends upon decisions made by
planners on the basis of their evaluation of the country's needs,
taking into account political, military, and other noneconomic
considerations.

Past Priorities

The
Bolsheviks (see Glossary), who assumed power in late 1917,
sought to mold a socialist society from the ruins of old tsarist
Russia. This goal was ambitious and somewhat vague; Karl Marx and
Friedrich Engels, who developed
Marxism (see Glossary), provided no
blueprints for specific economic policies and targets. Chaotic
conditions produced by World War I and subsequent struggles during
the Civil War (1918-21) made pursuit of coherent policies difficult
in any case. The economic policies initially adopted by the regime
were a mixture of principle and expedience.

Soon after taking power, the regime published decrees
nationalizing the land, most industry (all enterprises employing
more than five workers), foreign trade, and banking. At the same
time, for tactical reasons, the government acquiesced in the
peasants' seizure of land, but the new leaders considered the
resulting fragmented parcels of privately owned land to be
inefficient.

Beginning in 1918, the government made vigorous but somewhat
haphazard efforts to shape and control the country's economy under
a policy of
war communism (see Glossary). But in 1920, agricultural
output had attained only half its prewar level, foreign trade had
virtually ceased, and industrial production had fallen to a small
fraction of its prewar quantity. Such factors as the disastrous
harvest of 1920, major military actions and expenditures by the Red
Army, and general wartime destruction and upheaval exacerbated the
economy's problems.

In 1921 Vladimir I. Lenin called a temporary retreat from
application of the ideological requirements of Marxism-Leninism.
His new approach, called the New Economic Policy (NEP), permitted
some private enterprise, especially in agriculture, light industry,
services, and internal trade, to restore prewar economic strength.
The nationalization of heavy industry, transportation, foreign
trade, and banking that had occurred under war communism remained
in effect.

In the late 1920s, Stalin abandoned NEP in favor of centralized
planning, which was modeled on a project sponsored by Lenin in the
early 1920s that had greatly increased the generation of
electricity. Stalin sought to rapidly transform the Soviet Union
from a predominantly agricultural country into a modern industrial
power. He and other leaders argued that by becoming a strong
centrally planned industrial power, the country could protect
itself militarily from hostile outside intervention and
economically from the booms and slumps characteristic of capitalism
(see Industrialization and Collectivization
, ch. 2).

The First Five-Year Plan (1928-32) focused rather narrowly upon
expansion of heavy industry and collectivization of agriculture.
Stalin's decision to carry out rapid industrialization made
capital-intensive techniques necessary. International loans to
build the economy were unavailable, both because the new government
had repudiated the international debts of the tsarist regime and
because industrialized countries, the potential lenders, were
themselves coping with the onset of the Great Depression in the
early 1930s. Stalin chose to fund the industrialization effort
through internal savings and investment. He singled out the
agricultural sector in particular as a source of capital
accumulation.

The First Five-Year Plan called for collectivization of
agriculture to ensure the adequacy and dependability of food
supplies for the growing industrial sector and the efficient use of
agricultural labor to free labor power for the industrialization
effort. The regime also expected collectivization to lead to an
overall increase in agricultural production. In fact, forced
collectivization resulted in much hardship for the rural population
and lower productivity. By 1932 about 60 percent of peasant
households had joined state farms or collective farms. During the
same period, however, total agricultural output declined by 23
percent, according to official statistics. Heavy industry exceeded
its targets in many areas during the plan period. But other
industries, such as chemicals, textiles, and housing and consumer
goods and services, performed poorly. Consumption per person
dropped, contrary to plan the planned rates pf consumption.

The Second Five-Year Plan (1933-37) continued the primary
emphasis on heavy industry. By the late 1930s, however,
collectivized farms were performing somewhat better (after reaching
a nadir during the period 1931-34). In 1935 a new law permitted
individual peasants to have private plots, the produce of which
they could sell on the open market. According to official
statistics, during the Second Five-Year Plan gross agricultural
production increased by just under 54 percent. In contrast, gross
industrial production more than doubled.

The Third Five-Year Plan (1938-41) projected further rapid
industrial growth. The government soon altered the plan, however,
in an attempt to meet the growing danger of war, devoting
increasing amounts of resources to armaments. When the country went
to war with Finland (1939-40), serious disruptions occurred in the
Soviet transportation system. Nonetheless, during these years the
economy benefited from the absorption of Estonia, Latvia,
Lithuania, Bessarabia, and the eastern part of Poland and from the
growing trade with Germany that resulted from the 1939
Nazi-Soviet Nonaggression Pact
(see Glossary;
Prelude to War
, ch. 2).

After the German invasion of 1941, damage to the economy in
both human and material terms was devastating. The regime virtually
abandoned the Third Five-Year Plan as it sought to mobilize human
and material resources for the war effort. During World War II, an
increasing proportion of products and materials were allocated
centrally, and Gosplan took over more of the balancing and
allocation plans. Wartime economic plans did not officially replace
the traditional planning process but were simply superimposed as
needed to cover activities and goods essential to the war effort
(see The Great Patriotic War
, ch. 2).

The Fourth Five-Year Plan began in 1945. During the early years
of the period, attention focused on repair and rebuilding, with
minimal construction of new facilities. Repair work proceeded
briskly, with spectacular results. The country received no
substantial aid for postwar reconstruction, Stalin having refused
to consider proposals for participation in the
Marshall Plan (see Glossary) in 1947. Hungary, Bulgaria,
Romania, and especially
defeated Germany made reparations payments to the Soviet Union,
however, consisting in large part of equipment and industrial
materials. Entire German factories and their workers were brought
to the Soviet Union to train Soviet citizens in specialized work
processes. Although the government never published definitive
statistics, an authoritative Western assessment estimated the value
of reparations at an average of 5 billion rubles per year between
1945 and 1956. The exertions of the country's inhabitants, however,
coupled with ambitious economic strategies, proved most crucial for
the recovery.

During the war years, the government had transferred
substantial numbers of industrial enterprises from threatened
western areas to Asian regions of the country. After the war, these
facilities remained at their new sites as part of an effort to
promote economic development. These locations had the advantage of
being near raw materials and energy sources. The government also
deemed it strategically sound to have the important installations
of the country distributed among several regions.

Like earlier plans, the Fourth Five-Year Plan stressed heavy
industry and transportation. The economy met most of the targets in
heavy industry. The performance of agriculture again lagged behind
industry. Western observers believed that factors in agriculture's
poor performance included a paucity of investment, enforcement of
a strict quota system for delivery of agricultural products to the
state, and tenuous linkage between wages and production, which
deprived farmers of incentives. Housing construction, community
services, and other consumer items also lagged noticeably. During
the final years of the plan, Stalin launched several grandiose
projects, including building canals and hydroelectric plants and
establishing tree plantations in the Armenian, Azerbaydzhan,
Georgian, and Ukrainian republics and in the Volga River area of
the Russian Republic to shield land from drying winds.
Collectively, these efforts were referred to as "the Stalin plan
for the transformation of nature."

Throughout the Stalin era, the pace of industrial growth was
forced. On those occasions when shortages developed in heavy
industry and endangered plan fulfillment, the government simply
shifted resources from agriculture, light industry, and other
sectors. The situation of the consumer improved little during the
Stalin years as a whole. Major declines in real household
consumption occurred during the early 1930s and in the war years.
Although living standards had rebounded after reaching a low point
at the end of World War II, by 1950 real household consumption had
climbed to a level only one-tenth higher than that of 1928. Judged
by modern West European standards, the clothing, housing, social
services, and diet of the people left much to be desired.

Although Stalin died in 1953, the Fifth Five-Year Plan (1951-
55) as a whole reflected his preoccupation with heavy industry and
transportation, the more so because no single leader firmly
controlled policy after Stalin's death
(see Collective Leadership and the Rise of Khrushchev
, ch. 2). In many respects, economic
performance pleased the leadership during the period. According to
government statistics (considered by Western observers to be
somewhat inflated), the economy met most growth targets, despite
the allocation of resources to rearmament during the Korean War
(1950-53). National income increased 71 percent during the plan
period. As in previous plans, heavy industry received a major share
of investment funds. During the final years of the Fifth Five-Year
Plan, however, party leaders began to express concern about the
dearth of consumer goods, housing, and services, as they reassessed
traditional priorities. The new prime minister, Georgii M.
Malenkov, sponsored a revision of the Fifth Five-Year Plan,
reducing expenditures for heavy industry and the military somewhat
in order to satisfy consumer demand. The newly appointed
first secretary (see Glossary) of the party, Khrushchev, launched a
program to bring under cultivation extensive tracts of virgin land
in southwestern Siberia and the Kazakh Republic to bolster fodder
and livestock production. Although Malenkov lost his position as
prime minister in 1955, largely as a result of opposition to his
economic policies, the austere approach of the Stalin era was never
revived.

An ambitious Sixth Five-Year Plan was launched in 1956. After
initial revision, prompted at least in part by political
considerations, the regime abandoned the plan in 1957 to make way
for a seven-year plan (subsequently reduced to a five-year plan)
that focused particularly on coal and oil production and the
chemical industry. Khrushchev, who became principal leader after
1956, took particular interest in these areas of production. The
seven-year plan provided substantial investment funds--over 40
percent of the total--for the eastern areas of the country.
Khrushchev also sponsored reforms to encourage production on the
private plots of collective farmers.

During the seven-year plan, industrial progress was
substantial, and production of consumer durables also grew. The
national income increased 58 percent, according to official
statistics. Gross industrial production rose by 84 percent, with
producer goods up 96 percent and consumer goods up 60 percent.
Growth rates slowed noticeably during the final years of the plan,
however. Party leaders blamed Khrushchev's bungling efforts to
reform the centralized planning system and his tendency to
overemphasize programs in one economic sector (such as his
favorite, the chemical industry) at the expense of other sectors
(see Reforming the Planning System
, this ch.). Agriculture's
performance proved disappointing in the 1960s; adverse weather in
1963 and 1965, as well as Khrushchev's interference and policy
reversals, which confused and discouraged the peasants' work on
their private plots, were contributing factors. Khrushchev's
economic policies were a significant, although not sole, reason for
his dismissal in October 1964.

The Eighth Five-Year Plan (1966-70), under the leadership of
Khrushchev's successor as party head, Brezhnev, chalked up
respectable growth statistics: national income increased 41 percent
and industrial production 50 percent, according to government
statistics. Growth in producer goods (51 percent) outpaced that in
consumer goods (49 percent) only slightly, reflecting planners'
growing concern about the plight of consumers. During the late
1960s, Brezhnev raised procurement prices for agricultural
products, while holding constant retail prices for consumers.
Agriculture thus became a net burden on the rest of the economy.
Although production increased, the sector's performance remained
unsatisfactory. The country had to import increasing amounts of
grain from the West.

In the Ninth Five-Year Plan (1971-75), a slowdown in virtually
all sectors became apparent
(see The Economy
, ch. 2). National
income grew only 28 percent during the period, and gross industrial
production increased by 43 percent. The 37 percent growth rate for
the production of consumer goods was well below the planned target
of 45.6 percent. Problems in agriculture grew more acute during the
period. The gap between supply and demand increased, especially for
fodder.

Results for the Tenth Five-Year Plan (1976-80) were even more
disappointing. National income increased only 20 percent and gross
industrial production only 24 percent. The production of consumer
goods grew a meager 21 percent. Western observers rated the growth
of the country's gross national product
(
GNP--see Glossary) at less than 2 percent in the late 1970s.

For Soviet leaders, the modest growth rates were a perplexing
problem. The ability to maintain impressive growth rates while
providing full employment and economic security for citizens and an
equitable distribution of wealth had always been one area in which
supporters of the Soviet system had argued that it was superior.
Soviet leaders could point to many achievements; by virtually any
standard, the gap between the Soviet economy and the economies of
other major industrialized powers had narrowed during the years of
Soviet rule. Throughout the early decades of the economy's
development, plans had emphasized large, quick additions of labor,
capital, and materials to achieve rapid, "extensive" growth.

By the 1970s, however, prospects for extensive growth were
limited. During the 1960s, the Soviet Union had shown the fastest
growth in employment of all major industrial countries, and the
Soviet Union together with Japan had boasted the most rapid growth
of fixed capital stock. Yet Soviet growth rates in productivity of
both labor and capital had been the lowest. In the 1970s, the labor
force grew more slowly. Drawing on surplus rural labor was no
longer possible, and the participation of women in the work force
was already extensive. Furthermore, the natural resources required
for extensive growth lay in areas increasingly difficult, and
expensive, to reach. In the less-developed eastern regions of the
country, development costs exceeded those in the European parts by
30 percent to 100 percent. In the more developed areas of the
country, the slow rate at which fixed assets were retired was
becoming a major problem; fixed assets remained in service on
average twice as long as in Western economies, reducing overall
productivity. Nevertheless, in the late 1970s some Western analysts
estimated that the Soviet Union had the world's second largest
economy, and its GNP continued to grow in the 1980s (see
table 31, Appendix A).

Serious imbalances characterized the economy, however, and the
Soviet Union lagged behind most Western industrialized nations in
the production of consumer goods and services. A stated goal of
Soviet policy had always been to raise the material living
standards of the people. Considerable progress had been made;
according to Western estimates (less flattering than Soviet), from
1950 and 1980 real per capita consumption increased 300 percent.
The country's leaders had devoted the bulk of the available
resources to heavy industry, however, particularly to "production
of the means of production." Levels of consumption remained below
those of major capitalist countries and most of the socialist
countries of Eastern Europe. By the late 1970s, policy makers had
recognized the need to improve productivity by emphasizing quality
factors, efficiency, and advanced technology and tapping "hidden
production reserves" in the economy.

Concern about productivity characterized the Eleventh Five-Year
Plan (1981-85). The targets were rather modest, and planners
reduced even those after the first year of the period. Achievements
remained below target. The plan period as a whole produced a modest
growth rate of 3 to 4 percent per year, according to official
statistics. National income increased only 17 percent. Total
industrial output grew by 20 percent, with the production of
consumer goods increasing at a marginally higher rate than producer
goods. Agricultural output registered a meager 11.6 percent gain.